Dr. Craig Tockman - Director of Field Operations, North American Animal Health

Rick Betts - Director of North American Medical Sales and Marketing

Analysts

Jim Sidoti - Sidoti & Company

Ross Taylor - C.L. King

Ethan Roth - Stifel Nicolaus

Jeff Frelick - Canaccord

Kevin Ellich - Piper Jaffray

Ben Haynor - Feltl and Company

Operator

Good afternoon, and welcome to the Abaxis' Reports Fourth Quarter and Fiscal Year 2014 Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Joe Dorme. Sir please go ahead.

Joe Dorme

Thank you. Good afternoon and thank you for joining us today to review the financial results of Abaxis for the fourth quarter and fiscal year 2014, ended on March 31, 2014. As Amy indicated, my name is Joe Dorme, I'm with Lytham Partners and we are the Investor Relations consulting firm for Abaxis.

With us today, representing the company, are Mr. Clint Severson, Chairman and Chief Executive Officer; Mr. Al Santa Ines, Chief Financial Officer; Mr. Donald Wood, Chief Operations Officer; Dr. Craig Tockman, Director of Field Operations, North American Animal Health; and Mr. Rick Betts, Director of North American Medical Sales and Marketing. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session.

If anyone participating on today's call does not have a full text copy of the release, you can retrieve it from the company's web site at abaxis.com or numerous financial web sites.

Before we begin with prepared remarks, we submit for the record the following statement. This conference call may include statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements related to the company's cash position, financial resources, and potential for future growth, market acceptance of new or planned product offerings, future recurring revenues and results of operations.

Abaxis claims the protection of the Safe Harbor for forward-looking statements contained in the Reform Act. These forward-looking statements are often characterized by the terms, may, believe, projects, expects, anticipates, or words of similar import, and do not reflects historical facts.

Specific forward-looking statements contained in this conference call may be affected by risks and uncertainties including, but not limited to, those related to transitioning medical sales to Abbott, losses or system failures with respect to the company's facilities or manufacturing operations, fluctuations in quarterly operating results, dependence on sole suppliers, the market acceptance of the company's products, and the continuing development of its products, required FDA clearance and other government approvals, risks associated with manufacturing and distributing its products on a commercial scale free of defects, risks related to the introduction of new instruments manufactured by third-parties, risks associated with competing in the human diagnostic market, risks related to the protection of the company's intellectual property or claims of infringement of intellectual property asserted by third parties, risks related to the condition of the United States economy and other risks detailed under Risk Factors in the Annual Report on Form 10-K and other periodic reports filed from time to time with the United States Securities and Exchange Commission. Forward-looking statements speak only as of the date statements were made. Abaxis does not undertake and specifically disclaims any obligation to update forward-looking statements.

With that having been said, I would like to turn the call over to Mr. Clint Severson, Chairman and Chief Executive Officer of Abaxis. Clint?

Clinton Severson

Great. Thank you Joe and good afternoon everybody. And I’ll review the accomplishments and the challenges for Q4 FY2014 and some of the goals for 2015. And then after my short presentation I’ll ask Don Woods our Interim Director of North American Animal Health and Rick Betts our Director of Sales and Marketing for North America and Medical to give an update on their respective businesses and then we’ll take some questions.

Q4’s results reflect the final quarter’s action in making the adjustments in our North American vet business we talked about in our previous three conference calls. The big challenge in the past three quarters was our inability to smoothly transition from a direct sales approach to mostly distributed model. This caused imbalances in field inventory, mixed performance from some of our smaller distributor partners and disruption in our field sales organization.

This also had a cascading effect that made forecasting more difficult, which caused inefficiency in our factory leading to higher factory costs and lower gross margins. The actions we took in Q3 and Q4 this year while painful for the periods were taken to speed up the fixes and position us for our next fiscal year with balanced field inventory, trained field sales people that are proficient at working with distributors, clear forecast and expectations for all of our distributed partners and a focus on introducing our instruments and the benefits of using AVRL to all the vet practices that have not yet experienced the advantages of using the state-of-the-art systems and services. The heavy-lifting is complete, and we’re now positioned to get back to our goal of double-digit growth in FY 2015.

Sales in Q4 finished at 42 million, down year-over-year but up quarter-over-quarter, while disappointing, it does not reflect the performance of sales to our customers. Q4 last year, we had second stocking order from our partners that had only three months experience with Abaxis products. MWI ordered about $9.7 million worth of Abaxis products in Q4 last year with only 5.4 million in sales to end users. This was on top of $6 million order shipped in Q3 FY 13 where they had no sales to customers. While we shipped and recorded the 9.7 million, only 5.4 million were sold to our end-users Q4 FY '13. The net stocking orders for FY ‘13 was about 10.3 million.

Q4 this year, we focused on the final phase of curing the imbalances in distributor inventories, which resulted in sales to end-users in Q4 '14 that were recorded by Abaxis in previous quarters. Prior to signing the MWI and Abbott, our sales to end-users track more closely with our reported revenues, business, but since Q3 FY 2013 has changed, our goal for the next fiscal year is to manage inventory build to sales to end-users.

If we adjust Q4 FY '13 sales to exclude the stocking order, we would subtract 9.7 million from our reported 49.9 million, which will give us adjusted sales to end-user for Q4 FY ‘13 of about 40 million. We took out about $5 million out of our U.S. distributor vet inventory in Q4 this year, in addition to the approximately 6 million we took out in Q3, so our adjusted sales to end-users for Q4 FY ‘14 will be about 47 million or up about 17%.

For the year total sales finished at $172 million, down 8%; but if you would adjust for the products sold to distributors in Q3 and Q4 last year but sold to end-users in Q3 and Q4 this year, you have to adjust FY ‘13 sales down about 10 million and add this to FY ‘14 sales. With this adjusted FY ‘13 sales would have totaled about a 176 million and FY ‘14 sales for of total about 182 million or up about 4%. We had instrument placements in our North American vet market in Q4 this year, up about 849 instruments installed versus 853 installed Q4 last year. And this was all done with about 24% reduction in sales and marketing cost. More from Don and Craig in a few minutes.

AVRL sales finished Q4 FY ‘14 at $2.8 million, up 55% year-over-year and up 13% quarter-over-quarter, with losses down $100,000 versus last quarter and $600,000 versus Q4 last year, with the gross margin at a positive 1%. Our goal is to get AVRL back to double-digit growth quarter-over-quarter, was met in Q4 by focusing on accounts that link our point-of-care solution to lab services.

Worldwide vet sales finished Q4 FY '14 at $34 million, down about 20% year-over-year but up 6% quarter-over-quarter. If you adjust for the stocking order Q4 last year and the 5 million sold to end-users that came on in distributors' inventories, sales to end-users totaled about 39 million in Q4 this year versus about 33 million sold to end-users in Q4 last year or up about 18%. For FY 2014 worldwide vet sales total $141 million, down about 7%. But if you adjust for the stocking orders in fiscal year ‘13 and sales to end-users in fiscal year ‘14, total worldwide vet sales finished at about 151 million, up about 8%.

Worldwide medical sales closed Q4 FY '14 at $7 million, up 13% year-over-year, but down 10% quarter-over-quarter due to fewer Piccolo instrument sales. Worldwide medical sales for the year were down 11% duty comparisons that include a large CRO order last year and the first Abbott stocking order received in Q3 FY ’13. More to follow from Rick in a few minutes.

Total North American sales for Q4 finished at 33 million, down 22% year-over-year, but up 3% quarter-over-quarter. If you adjust for the $9.7 million stocking order placed Q4 last year and add the sales to the end-users from distributor inventories Q4 this year, North American end-user sales were about 38 million, up about 17% versus Q4 last year. For the year, North American sales finished at about $137 million, down about 11%, but adjusted for sales to end-users, domestic sales finished the year up about 3% or $147 million.

International sales finished Q4 at a record $9.2 million up 14% year-over-year and up 2% quarter-over-quarter. European sales totaled 7 million in Q4 FY14 up 13% year-over-year and sales to the Pacific Rim add 2.2 million for the quarter up 18% versus Q4 last year. For the year international sales totaled 35.3 million up 6%.

However if you exclude the large CRO deal closed in FY13 international sales were up 16%, vet disc sales of 1.1 million units were down 24% versus Q4 last year. However vet disc sales to end users were approximately 1.3 million units. If you adjust vet disc sales for approximately 215,000 unit imbalance due to the addition of MWI in Q3 and Q4 last year and compare Q4 ‘14 end user sales with the adjusted number for Q4 last year, vet disc sales to end users were up about 3%.

Quarter-over-quarter unadjusted vet disc sales finished up 6%. If you adjust for the reduction in U.S. distributor inventory vet disc sales to end users at about 1.3 million were up 7% versus last quarter. For the year vet disc sales finished at 4.3 million units down about 15%, but if you adjust for sales to end users total vet disc sales finished at about 4.9 million units. If you adjust last year’s sales for the imbalance and stocking orders of about 425,000 units, vet disc sales to end users finished FY14 up about 7%.

Medical disc sales for Q4 were strong at 740,000 units up 37% year-over-year and up 2% quarter-over-quarter. For the year medical disc sales finished at 2.7 million units, up 10% versus FY13. Total disc sales of 1.8 million units were down 8% year-over-year but up 4% quarter-over-quarter. If you adjust FY14 disc sales for the imbalances due to the stocking orders and Q4 FY14 what was sold to end users total disc sales in Q4 ‘13 would have totaled 1.8 million units and Q4 FY14 2 million units, up about 13%.

For the year total disc sales finished at 7 million units, down 7% but adjusted for end user sale and the imbalance due to stocking orders in Q3 and Q4 FY13 total rotors finished at about 7.6 million units, up about 8%. We ended FY2013 with an imbalance of disc inventory of about 425,000 units and finished FY14 selling 617,000 more disc to end users spend to distributors.

Other vet consumable sales include i-STAT and coag cartridges, hematology reagents and rapid tests, total 6.6 million for Q4 ‘14, down about 25% year-over-year but up 17% quarter-over-quarter and for the year vet consumable other vet consumable sales totaled $27.8 million down about 1%. We expect to see other vet consumable sales grow with the introduction of our new rapid test and the correction of the imbalances in distributor inventory, which was accomplished in Q4 this year.

We sold 1,060 instruments in Q4 this year versus 1,485 in Q4 last year or down 29%. End-user instrument sales totaled 1,278 units, as about 218 instruments were taken out of the distributor inventory. Stocking orders last year totaled approximately 457 instruments. We sold 487 VetScans from our inventory and additional 41 VetScans from distributor inventory for a total of about 528 going to end-users versus 473 VetScans sold in Q4 last year and 377 last quarter. For the year we sold 1,916 VetScans versus 2,036 last year.

We sold 141 hematology instruments from our inventory and additional 133 units from distributor inventory for a total of 274 units to end-users versus 341 in Q4 last year and 204 last quarter. For the year we sold 1,096 hematology instruments versus 1,341 FY13. We sold 148 Piccolos versus 183 in Q4 last year and 238 last quarter. For the year we sold 754 Piccolos instruments versus 1,072 last year. But if you exclude the large CRO order shipped in FY13, total Piccolos instruments sold in FY13 would have totaled 812. And finally, we sold 284 i-STAT and coag instruments from our inventory and 44 out of distributor inventory for a total of 328 versus 488 in Q4 last year and 430 last quarter.

17% of our sales for Q4 were medical sales while 81% were vet sales and 2% other. This compares with 13%, 86% and 1% in Q4 last year and 19%, 79% and 2% last quarter. For the year 16% of total sales were medical and 82% were vet and 2% were other. 78% of sales in Q4 '14 were North American while 22% were international. This compares with 84%, 16% in Q4 last year and 78%, 22% last quarter. For the year the mix was 79% North American, 21% international. 17% of total sales in Q4 '14 were capital sales, while 83% were consumable. This compares with 21%, 79% in Q4 last year and 20%, 80% last quarter.

The disc average selling price finished Q4 at $12.76, down $0.77 year-over-year but up $0.07 quarter-over-quarter. The reason for the decline in ASP is due to mix. For the year the ASP was down $0.44 again due to mix. Disc cost for Q4 finished at $3.96, up $0.20 year-over-year but down $0.15 quarter-over-quarter. The reason for this cost going up year-over-year were lower this volume in the factory. Disc margin for Q4 finished that 69% and for the year at 69%.

Total gross margins were negatively affected by the issues discussed earlier and finished at 50%, up 260 basis points quarter-over-quarter and down 240 basis points year-over-year. Higher disc costs along with lower ASPs as well as higher minimum royalties on rapid test are the main reason for the lower margin year-over-year.

With the launching of additional rapid test and the improvements in our performance of our North American vet market, we expect margins to improve going forward. Now one of the few upside this quarter is that operating expenses were well under control, finishing the quarter at $15.2 million, down $2 million or 12% year-over-year to finish at 36% of sales. For the year operating expenses excluding Cepheid’s legal settlement in FY ’13 were down 8.3 million or 12% or about 36% of sales; compared to FY ‘13 performance of 30% of sales which included the Cepheid’s legal settlement. Now if you exclude the legal settlement in Q2 FY ‘13 operating expenses for the year would have come in at 38% sales.

Sales and marketing expenses for Q4 FY '14 totaled $8.7 million or 20.7% of sales versus 22.6% of sales in Q4 last year, and 21.3% of sales last quarter. For the year sales and marketing expenses finished the 21.7% of sales versus 25.2% of sales last year. For the year sales and marketing expenses were down $9.6 million. R&D expenses for Q4 finished at 3.5 million or 8.2% of sales, up from 6.5% of sales in Q4 last year but down from 8.8% of sales last quarter. R&D expenses for the year were flat compared to FY ‘13 to finish it 7.9% of sales versus 7.3% of sales last year. Admin expenses in Q4 at $3 million or 7.2% of sales; were up from 5.3% of sales in Q4 last year, and 5.9% of sales last quarter. For the year admin expenses finished at 6.6% of sales versus 6.9% of sales FY ‘13. For the year admin expenses were down $1.5 million.

Operating earnings for Q4 ‘14 at 5.8 million, were down 35% year-over-year but up 26% quarter-over-quarter. Year-over-year performance was affected by products coming off of distributor shelves versus Abaxis shelves. For the year operating earnings finished 21 million, down 51% due to issues previously discussed. Now if we exclude the some Cepheid legal settlement in FY ‘13 operating earnings would have been down about 25%. Net income for Q4 '14 totaled $3.7 million, down 44% year-over-year but up 16% quarter-over-quarter. Q4 earnings per share finished at $0.17, down from $0.30 in Q4 last year but up from $0.14 last quarter. For the year, net income totaled 14.2 million, down 48% due to issues previously discussed. But if you exclude the Cepheid legal settlement that was booked Q2 FY ‘13 our earnings for the year would have been down by about 24%.

On the R&D and regulatory side of the business, we had some breakthroughs with the clearance of our CLIA waived finger stick lipid panel class III clearance in Canada and Ehrlichia was cleared to the USDA last week along with clinical protocol for Anaplasma which was approved as well. We’re now working with our vendor who has completed two additional rapid test to assist them with getting their clinical protocols approved at the USDA. The goal this quarter is to submit three additional rapid test in the USA -- to the USDA and gained clearance of these new tests this quarter.

We continue to work on the feasibility the high sensitivity immunoassay project with LamdaGen, and if successful, we'll start development of our target analytes sometime this calendar year. We’re also developing a custom chemistry panel for the Italian market which will help us keeping our European business at record levels.

Our goals for FY2015 include getting back to double-digit growth on both the top and the bottom line. AVRL continues to be a priority, increasing sales growth and reducing the loss through targeting customers, mostly likely to benefit from our approach of splitting the sample and running the routines in-house on our point-of-care equipment and using AVRL for their specialty test needs.

We continue to work with our retail customers as they complete their two on-site validation study of the Piccolo and Rick will cover more of that in a few minutes. We also are working with clinical research organizations to identify trials where point-of-care testing will reduce complexity of time.

Now we’re very pleased to report that the Abaxis Board of Directors has approved our first quarterly dividend of $0.10 a share per quarter starting June of this year. Our strong cash flow this year along with our expectations for strong financial performance in FY2015 was the reason for this decision. I personally believe the growth company can pay dividends. If the company has managed for both growth and cash flow and it is my goal to grow both the dividend and the company.

So with Don you’re on.

Don Wood

Good afternoon. In my remarks, I will provide some additional information surrounding the North American Animal Health business and I will turn it over to Dr. Craig Tockman, our new Head of Veterinary Sales. As you recall, our new management team assume responsibility and leadership for North American Animal Health in early October and worked in Q3 and again in Q4 with renewed emphasis on our distributor partners relationships and cleaning up the inventory issues caused by our transition from a direct selling model to a focused distributed model.

Our focus on Q4 was completing our realignment of the sales territories to better balance new versus existing customers for managing our customer base and we strengthened the overall management of our team. To further update our sales programs and refine and instrument sales and focus on our large main contributors, margin contributors and to help our distributors to re-bounce the inventory.

To utilize the new tools put in place last quarter receiving frequent end user sales reports from each distributor to monitor and plan the reduction and balancing of our distributor partners’ inventory. We continue working our focused target list of perspective customers and to improve our sales pipeline with the goal of continuing the improvements in productivity gains per area sales manager. To add consistent focus on AVRL as a key closing tools for a complete lavatory solution with a goal of getting back to double-digit growth. And in January and February we also had meetings with many of our national accounts and we’re pleased with the results that we’re seeing from this important segment of our business and our efforts.

We also are excited to see another rapid test come on board in Q1 and the possibility of seeing three additional tests coming on soon, as greatly excited our sales team and our management. I would like to give a big thanks to R&D team for their work on this project.

Finally I am excited to tell you that our goal of cleaning up the distributor inventory has been accomplished and we’re very happy to see Q1 fiscal year ‘15 begin and putting this issue clearly behind us. Our sales team has improved in selling performance two quarters in a row and the programs we put in place are effective and will return us to double-digit growth. Our strongest quarters now lie ahead.

With that I will turn it over to Dr. Craig Tockman the Head of North American Animal Health Sales to provide you with details on Q4 fiscal year ‘14.

Craig Tockman

Thank you Don. While we again tempered our revenue goals for the quarter to properly balance inventory with our distributor partners for a successful FY15. Our instrument sales momentum from Q3 continued into Q4 and an additional instrument fourth quarter placement record was set. Our new sales programs continued to be effective and our training initiatives are proving to have us well positioned for the future.

Q4 fiscal year ‘14 revenue of 26.56 million was down 26% of 9.38 million year-over-year but up 6% or 1.51 million quarter-over-quarter. If we exclude the MWI stocking order of approximately 9.7 million in Q4 FY13 and include the sales to end users that came from distributers inventory of about 5 million this quarter, total domestic veterinary sales finished at 31.56 million this quarter compared to 26.24 million in Q4 last year an adjusted increase of 20%. Instrument sales remain incredibly strong with our new focus and program changes.

Our field sales team set a new Q4 record for VetScan placements of 359, we placed 849 total instruments. Q4 last year we placed 853 instruments, however 103 of those instruments were in two major one-time accounts, so our year-over-year increase was an adjusted 13%. Quarter-over-quarter instrument placements were down on expected 18% as Q3 was always strongest instrument sales quarter.

Another measure of the gains that we are making is the productivity of our field sales team. Over the last two quarters our field sales team has averaged almost 19 instruments placements per rep per quarter versus just over 13 over the same period the previous year. And in Q4 67% of our placements were with our core products the VS2 and HM5 analysers leading to higher utilization and margin potential. We also optimized our new place and procedures to sell additional rotor types and optimize our margin at the point of sale and improve long-term utilization potential.

Our national accounts business continues to grow as well. Our Q4 national accounts revenue was up 37% year-over-year but down 12% quarter-over-quarter due solely to strong instrument sales in Q3 as expected. We expect further expansions to explore additional opportunities. We continue to make significant gains with our customers adopt in the use of a AVRL as their send-out lab provider. AVRL with net revenue of $2.8 million was up 13% or $332,000 from the prior quarter and up 55% versus a year ago, with Q4 showing a positive gross profit and making overall profitability even closer. We have also enhanced our sales approach to link instrument sales with AVRL utilization and we expect increasing gains throughout FY ’15.

Our management team continues to implement new efficiencies and increasing revenues continue to make a positive impact in the net revenue. AVRL continue to innovate, recently announcing their ability for the Doctor to trend the patient results to our AVRL web site. This is an important information allowing the Doctor to have far better information for monitoring their patients’ health and response to therapy. Innovative ideas like this continue to open new doors and gain momentum throughout the industry. We have experienced a lot of pain over the last several quarters to help our distributor partners to move their inventory to the proper levels, and we now have accomplished this.

In addition we are confident of the swings between distributors after the on boarding of a new national partner, five quarter ago, has stabilized. And moving forward, sales from all of our partners can be properly managed and forecasted. Moving forward we will work together to maintain levels consistent with customer sales and utilization to prevent issues we have experienced this past fiscal year. Once again, our results this quarter are completely consistent with our plans to balance the distributor inventory mix and imbalance issues.

In FY ‘15 we will continue to work not only increase analyser placements but to improve the utilization of all of our products in the veterinary hospital. Working on side or distributor partners we have created a new program to accomplish this and are excited about the potential increase in sales. The relationships with our partners have never been better and we continue to seek methods together to grow our business. This is the key to our continued success and with the state of the veterinary market extremely likely to be successful.

Our competition in every segment of our business has always been strong and aggressive and we do not expect that to change. We’ll continue to make every effort to stay ahead of the trends in our industry and focus on the needs of our customers in order to more growth to the historic double digits we all expect. Our dedicated sales, marketing, professional services, AVRL, product management, customer service and technical service teams are not only ready for the challenge but excited to win the battle.

Back to you Clint.

Clinton Severson

Thank you, Craig and Don. And now Rick, you're up.

Rick Betts

Thank you, Clint. Good afternoon all. For the quarter the domestic medical division finished with revenues of 4.89 million, up 18% year-over-year but down 9% quarter-over-quarter. For the year revenues were 19.05 million, down 8% from 20.69 million of the previous year. During the quarter 143 Piccolos were placed including a 127 by Abbott and 606,000 reagent discs were consumed in North America. For the fiscal year we added 617 new Piccolos customers and nearly 2.2 million reagent discs were used in patient care. Now that we have full fiscal year in partnership with Abbott, the domestic medical market looks to resume double-digit growth throughout fiscal year 2015.

While overall revenues well down domestically due to the Abbott discounts, profitability remained solid as a result of the reduced selling cost we have realized through the Abbott agreement. Additionally, as Clint mentioned we had to significant ribaldry development occurring in the fourth quarter. First, the FDA granted CLIA waived status to our cholesterol HDL and triglyceride tests for capillary draw. This now means that primary care practitioners, health screening companies and retail health organizations can diagnose, treat and monitor hyperlipidemia patients via a single fingerstick.

The second major announcement was the class III approval of the Piccolo by Health Canada. This is important, because in Canada, all point of care devices are class III. With this approval Canadian health care practitioners can now utilize the Piccolo as it was intended to diagnose and treat patients at the point of care. Now that we’re able to sell Piccolos in Canada for point of care use we expect accelerated clinical level adoption and revenue growth from our operation north of border in fiscal year ‘15

On the retail health front we began our pilot expansion with a major pharmacy chain. As previously mentioned this pilot is in a different area of the country and focuses on the treatment and monitoring of the specific chronic condition that affects millions of Americans. For this pilot patients are driven to the retail health sites in partnership with the local hospital system. While we cannot discuss additional specific of this expansion we continued to support the Drug Store Corporation in our mission to fit their clinics with the best point of care diagnostics technology. Thank you. And with that I’ll turn it back over to Clint.

Clint Severson

Great. Thank you very much Rick. And with that we’re open for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question is from Jim Sidoti with Sidoti Company. Go ahead sir.

Jim Sidoti - Sidoti & Company

I have a suspicion that everybody there is pretty happy to put this year in the books and get started on the next one.

Clint Severson

That is true.

Jim Sidoti - Sidoti & Company

Can you tell me just some details on the quarter? For AVRL, did that breakeven in the quarter or what were the losses there?

Clint Severson

So the gross margin breakeven that was positive 1%, so that’s the first time gross margins that have been positive which is a milestone for AVRL and total loss for the quarter was about 6 million, was it?

Yeah, I think we’re starting to see some leverage in AVRL. Clearly building this business really from the ground up, we’ve done pretty well. I mean we’re over $10 million a year run rate and now the focus is, now we’ve got the gross margins even, so first milestone. Next milestone is break the business even and we do that by focusing on growing the customer base and increasing efficiency which is totally tied to increasing the number of tests coming through the lab.

Jim Sidoti - Sidoti & Company

And your goal of 10% revenue growth for the next year, does that include any contribution from the retail customer or from the new CRO or would they be upside to that goal?

Clint Severson

They’d be upside. We’re not forecasting any big new account closing.

Jim Sidoti - Sidoti & Company

Now the fact that you’ve got this new approval and it sounds like you’re advancing in the clinical trial with the weaker organization. Is there any color you can shed on that on when you think you should get an order there?

Clint Severson

I mean, they’re working through their validation study protocols and so far so good. It’s my belief that something will happen, sometime this fiscal year it’s going to happen but that’s just a belief. You never know for sure, but we’re optimistic here. I don’t know, Rick you want to comment?

Rick Betts

Just they communicated to us that they want to do this right and right doesn’t necessarily always mean fast. So we want to make sure that we give them the rope that they need in order to accomplish their goal of doing it right.

Jim Sidoti - Sidoti & Company

Alright. How about with the CROs? What is your expectation regarding CRO orders for fiscal ‘15?

Clint Severson

So the CRO we’re working on milestones right now. It’s really hard to forecast the clinical research business until you have clinical research organizations that have done all their due diligence and they have the data to prove to the pharmaceutical company that we can provide a more accurate answer quicker than the central lab. And you do that by doing the studies. And so that’s what we’re doing. So it’s hard to really predict when all that takes place, I mean once it does take place then the selling starts. So I think we’ve completed one or two of those -- two of those validation studies. And everything came out very well. So now we’re working on what? One or two more?

Rick Betts

Yes.

Clint Severson

Two more, and so every time you finish the study another question comes up. What about this we’ll then move to that in the next study. So it’s kind of like this business is kind of like planting a vineyard or planting and orchard. It takes a while for the trees of the vines to grow but then once they start producing the fruit, they are there for 40 year to 50 years. And so we’re investing in this segment and we believe that we’ll get a return here once we prove our performance and capabilities to the room. Rick do you have any other comments?

Rick Betts

No.

Jim Sidoti - Sidoti & Company

Any update on China and a possible partner there?

Clint Severson

So we’re actually interviewing -- we have a confidentiality agreement so I can’t say who. A very significant company that has a huge presence in China, and we have our European managing directors actually attending a meeting in China with these folks and actually meeting with the President of the company on his way to China. This opportunity looks really nice, but we are in the early phases. They’re doing due diligence with us. We are doing due diligence with them. But we believe it’s the kind of -- they have the kind of position there that will allow us to do like one deal, and not four or five different little distributors and three or four different provinces, and all that kind of stuff. So this approach looks substantial enough for us to focus on yes or no for this particular partner at this point in time. The meeting is scheduled for May 6; I believe or May 8, and next quarter we will be able to upload to update everybody on how it’s going. It looks pretty good.

Jim Sidoti - Sidoti & Company

And you have all the approvals you need for this Chinese FDA.

Clinton Severson

We have enough approval so we can sell our Piccolo machine in China.

Jim Sidoti - Sidoti & Company

And then another question is there anything left on the stock buyback program right now?

Clinton Severson

We have left 37 million.

Rick Betts

I think 47.

Clinton Severson

47 million, so we have got money left in the stock buyback program as well, yes.

Operator

Our next question is from Ross Taylor with C.L. King; go ahead please.

Ross Taylor - C.L. King

I have couple of questions. I guess Alpha start with the North American inventory issues, just to make sure I; kind of do understand the current situation. Do you feel like the inventory levels of both of the rotors as well as, your various instruments, essentially kind of normal levels at your distributors now?

Clinton Severson

Yes, Ross, everything is where we expect it to be. All of the consumer inventory is -- everybody is happy with their levels. It is less than a quarter. The instruments are in the same condition. There’s a couple that are slight plus one quarter, but nothing that we’re concerned about in anyway. Everybody is in great shape.

Ross Taylor - C.L. King

Did you just say your rotor levels are at kind of less than one quarter right now?

Clinton Severson

Yes.

Ross Taylor - C.L. King

And what would, kind of be an ideal level for your rotor units out at your distributors?

Clinton Severson

It depends on how the distributor orders. So most, in fact, believe that all of our distributors prior to this quarter that we just finished, are ordering once a quarter so that they could fill the truck. So in the beginning of a new quarter they would have about three months inventory because they just ordered. And then by the end of the quarter they would have nothing, or close to nothing. And then they would reorder again, fill the truck and away we go. Some of our distributors have decided that they would prefer a monthly system rather than a quarterly system. So those folks ordered last in Q4, then they would normally order because they ordered only months worth inventory. So it depends on the distributor of what’s normal or not.

Ross Taylor - C.L. King

Okay, this is probably getting to detail, but you know those distributors that prefer monthly order and I am just kind of inferring that their inventory levels are probably down close to that one month level?

Clinton Severson

That’s right.

Ross Taylor - C.L. King

And then also you are VetScan placement, look to me like they were very good, but they hematology and some of the other instruments were softer. I just want to know what might -- what that might be attributable to?

Clinton Severson

Okay, so kind of here is how the focus has changed from Q2 last year to Q4 last year. For Abaxis, the key is to get the VetScan in. Once get the VetScan in the practice, coming back later and adding the other instruments is actually pretty easy. And so we have encouraged our sales people both through suggestion and through incentives to focus more on getting the VetScan into more accounts first, less emphasis on the other stuff in the beginning. The wrapper is spending three days trying to get everything in practice, you spend the day getting VetScan in and then get into the next practice and get year VetScan in that one and the next but get the Vets okay. And then come back later and go for the other equipment. The reason that why we’re doing that is because it gives us more gross margin on the consumables, higher gross margin on the instrument and going back later to sell the other equipment takes less time and less effort because our customers are usually so impressed with the VetScan that it’s easier to sell the other things after they had had experience with the VetScan. So that’s why you see higher with VetScans and less other stuff. Now, going forward I will balance out because you’re going to see people going back to their old accounts selling the other equipments and as well as selling VetScan to new accounts. So it’s just a change in focus on the field sales people.

Ross Taylor - C.L. King

Okay, good. Just wanted two other questions on the vet side. You mentioned trending with AVRL on your web site. And is that trending just limited to the actual reference lab data or you can somehow combine or merge that with some of the VetScan data like one of your competitors does?

Clint Severson

So this goes to the connectivity project we have going here. So kind of the first phase is the laboratory stuff, and then the second phase is we’ll be able to trend everything that we do. And we’re working with a couple of vendors that are experts in this and the goal is to ultimately give it to cloud where anybody can access it. And so we have a very complex and aggressive project going here at Abaxis with a goal, this is a goal that introduced this in September. And so far the project looks really good with lots of exiting features that come with connectivity and all the Internet bells and whistles that are available these days. But right now it’s focused on the AVRL.

Ross Taylor - C.L. King

Alright. And my final question is just on medical, you had I think good performance there and I was just looking at the 740,000 rotors and that’s lot more rotors then you’ve ever sold in a March quarter before. And I just wondered is that reflective of end user demand or because rotor sales have been kind of weak for a few quarters, was there some inventory rebuild that was going on?

Clint Severson

So Abbott is doing an excellent job of selling Piccolo machines into higher volume accounts and that’s what it’s all about higher volume accounts. And so the consumable revenue is doing really well, Europe is up as well I believe this quarter, I don’t have the number right in front of me but for the year they’re certainly up on medial disc as well. So I think it’s a shift from focus on just moving machines, whether they do low volumes or high volumes to focus on moving instruments where the volumes tend to be higher. Rick you would comment.

Rick Betts

I think we had a couple of developments that happened earlier on the fiscal year that would impact disc usage. One is the elimination of the ALT, AST by Cholestech, lot more people started using the Piccolo discs for stat analysis on patients and you had the advent of Obamacare here. So there was more folks that are going to see the doctor these days, et cetera. So we expect that growth to continue this coming fiscal year as well.

Ross Taylor - C.L. King

I appreciate the detail. Thank you.

Clint Severson

And then I’ve got a couple of corrections too to make. So the buyback is $37 million, then on the clearance in China it’s actually fairly complicated. So instruments that we have built prior to a certain date have clearance, instruments built forward to that date were in the process of registering. So it has to do with the clearances expiring and then renewing. So to make that clear to everybody I want to make those corrections.

Operator

The next question is from Ethan Roth with Stifel. Go ahead please.

Ethan Roth - Stifel Nicolaus

Just a few questions here. The first Clint you discussed expectations for returning to double-digit growth in FY15. And the years you have grown double-digit, so it has been in kind of the 15% to 20% range, is that how you’re thinking about growth for next year?

Clint Severson

Well right now we’re just saying double-digit.

Ethan Roth - Stifel Nicolaus

And then just following on some of the question on lab profitability, the revenue ramp has picked back up and you clearly made progress in gross margin. But is there either a time line or revenue run rate where you expect the business to become profitable?

Clint Severson

So like a lot of start up businesses those numbers kind of move around. So I have stated prior at investor conferences and with other conference calls that we believe the breakeven was between 3 million and 4 million. Now as we get closer to the $3 million that are telling me that well it might be a little bit more than 4 million before it breaks even. So I am going to expand the range, even though it could improve because breaking even this quarter was kind of a pleasant surprise for us, I am not sure everybody in the lab would have really forecasted a breakeven this quarter. It’s just that they’re focusing now on the expenses and they cause an effect takes place.

So 3 million to 5 million let’s say is fair and I am pushing these guys to breakeven at somewhere between 3 million and 4 million but that’s the new range.

Ethan Roth - Stifel Nicolaus

Then jut last….

Clint Severson

So just to finish those, sometime the end of this fiscal year the beginning in the next fiscal year would be the timeline.

Ethan Roth - Stifel Nicolaus

Okay, great. And then just last question on the North American vet distribution. Just give us a sense if your biggest distributor is now focusing more with efforts on new account wins versus taking share from some of your other regional distribution partners?

Clinton Severson

Absolutely. Our entire focuses on new business, as I cleared earlier, we feel like everything has stabilized between our distributors, and it’s our job to make sure everybody is focusing on new business.

Operator

Our next question is from Jeff Frelick with Canaccord, go ahead please.

Jeff Frelick - Canaccord

Good afternoon folks. Clint, just put me a little more color on how you are now managing the inventory balance for the distributors. Are you - having the distributors, maybe carry a little less inventory or you’re not backing off that, any color there would be helpful.

Clinton Severson

The cause of all this was the big change in the way we sell stuff, I mean that’s really what the cause was. And our inability to recognize Q1 and Q2, that this was having a negative effect in our business. We didn’t recognize it until Q3. And that’s where we started taking action. We have, for our largest distributors we actually get sales every day. From our smaller distributors we get sales every week or every month. And clearly this is not only even painful for us, it’s been painful for them as well, because having this excess inventory causes cash flow issues, a lot of this product is got dates on it, so it’s perishable. And so nobody has any incentive on to carry extra inventory. We clearly have no incentive to knowingly shipped product that we believe is going to sit on the shelf for more than a quarter. I mean it doesn’t make any sense. So this was, like you said in the beginning of my earnings call, this was our inability to adjust from a direct model to a distributor model. And now we’re made adjustments. I think we have to figure it out. Craig and Don I will let you comment as well.

Donald Wood

I think that our distributors are very comfortable. We are back to, or I would consider has been the traditional area where we managed business, that all of the inventories that on the distributors shelves will sell within the quarter. And they are only buying what they need to be placed. And with the majority that has already been accomplished, with some we’ve actually done better. And as we talked earlier, one distributor decided to change how they purchase and that’s okay with us. And quite honestly we’re delighted to be in the point now that true end-user sales are how we tracked the business. But also all of the business will now occur within the quarter and we can show a nice improvement in sales.

Jeff Frelick - Canaccord

Thanks Don for the elaboration. Second question, so with the sales reps refocusing and reshaping in more to manage the distributors, can you speak any new metrics that you have implemented to kind of manage and measure what the end-user activity and distributor activities are?

Clinton Severson

Our sales people have a system where they identify potential customers in their territories. The profile them, they identify whether they’re likely to buy a VetScan versus a competitive product, and then they share that information with our distributor sales rep and each Abaxis sales rep has up to six distributors sales reps in their territory. So they work together to target the account with the goal of getting a demo. Once you get a demo of VetScan and if that clinic exactly not that difficult to close them, because there is such a huge advantage using the VetScan over other stuff. And so that whole process of working together with up to six different people versus you’re kind of on your own, doing your own thing, you know what’s the change that took a quarter to get people trained and up and going. So that’s the process changes that took place. And then of course, as far as the distributors are concerned, they have product managers, marketing managers. They have goals and objectives that they need to meet. They’re set by their management. And so what we need to do is we need to make sure that we understand what the forecast goal that they have. So we can support them in achieving the Abaxis number that they’ve set for their team. And so you work together on that and then our management team needs to meet with them every single quarter to identify what worked and what didn’t work, what do we need to do differently, and where we are on the forecast, for both the quarter and for the year. And still it’s a totally different process than what we had before. And so now we have got a couple of quarters under our belt working with this new process. And I think we’re confident that we can continue to improve going forward. With that Craig I will let you add anything you want to add to that.

Craig Tockman

I think if you want to understand, yes we’ve made significant changes in what we do, even day today in monitoring the metrics of the sales force and how they’re working with our distributors. So we know, on any day what’s been sold through distribution window on any day, which of our reps and which of their reps are working together and which are not. And so we can manage that from a higher level to ensure that we have the engagement that we need and we’re using multiple systems now in tracking both the instruments and the consumables to ensure that those relationships grow rather than shrink or stagnate. It that answers your question?

Jeff Frelick - Canaccord

Yeah, thank you. And just last question, Clint any color on how vet office visits were in the quarter? Thanks.

Clint Severson

Craig.

Craig Tockman

Everything we see is up and from individual vets anywhere from 2% to 10% increase in both their visits and their dollars that’s word of mouth and a lot of data elsewhere same thing.

Clint I hopped on late so I am sorry if I missed this if you guys talked about this already I can certainly go back and listen to the call or read the transcript. But did you give an update on the CVS pilot? And the second question I have is, given the change that you had with the distributors and the inventory channel issues last year. What’s the good way to think about fiscal ‘15 on a normalized basis? And I know you gave -- I heard last two questions so there is some information there but just wondering if there is a better way for me to think about it? Thanks.

Clint Severson

So we gave an update on a retail customer validation study and you can kind of go back to the transcript or the recording and listen to it. But fundamentally we’re doing a second validation study in a different state, and that’s actually going very well. And what was the second question?

Kevin Ellich - Piper Jaffray

Just thinking about…

Clint Severson

Normalized business, so we think we’re normalized now. We think we’ve got the adjustments have taken place, you can go back and listen to all the crazy numbers I gave out I gave out so many numbers I can’t even keep track on them anymore. But adjusted numbers, normal numbers actual numbers everything and so when you look at sale to end users was up nicely for the quarter. And now we believe that we’re back where our reported sales will be roughly the same as sales to end users.

Kevin Ellich - Piper Jaffray

And then just one last thing, you went back and said that some of the instruments in China we have approvals if they were built before a certain date and then those you need to get clearance manufactured after a certain date. What was the date or are you at liberty to tell us that?

Clint Severson

The date is not important because we have inventory available to ship. But we have made some improvements to the actual part that went obsolete, and the part makes the instrument look different. And so because it looks different we had to request a new approval, even though it’s substantially and almost completely the same instrument, except for the front screen. And so our submissions are complete to the government of China and basically we now wait for approval, they are very diligent like the FDA (Ph) and respectfully. So we have instruments that we can ship into the country. We’re approved on analytes into the country. So it’s not something that’s holding us up right now but over will have our new front face device approved, hopefully soon. That answers your question?

Kevin Ellich - Piper Jaffray

It does. Thank you very much.

Operator

Our next question is from Ben Haynor with Feltl Company. Please go ahead.

Ben Haynor - Feltl and Company

Just a couple of quick financial one’s for you. Do you expect the sales and marketing spend you guys you done a great job controlling that in the second half of fiscal ‘14 to try to continue at these types of levels or do you expect that to increase as you kind of hit those double-digit growth targets and higher commissions end up being paid out.

Clint Severson

So we expect our selling expenses as a percent of sales to stay pretty close to the numbers that we’ve reported. There are always some fluctuations where in a certain situation you might want to add people ahead of the sales. But in most cases we’re going to add the people, we’re going to add people after the sales to [indiscernible] but there could be some exceptions. Our goal is to kind of keep it where it is.

Ben Haynor - Feltl and Company

That’s helpful. And then on the double-digit growth target for the top line, is that target based or that goal based upon the reported numbers the 172 million or is that based upon the adjusted numbers that you offered earlier on the call?

Clint Severson

It’s both. That answers the question?

Ben Haynor - Feltl and Company

I guess so.

Clinton Severson

Anyway, you can do it on adjusted, it’s going to be double-digit, or you can do it on actual and double-digit. You can do it either way. Of course one will be higher than the other, right?

Good afternoon Clint and team. I just wanted to follow-up on the opportunity in Canada generated by the recent approval, which at least in my way of thinking is analogous to CLIA waived status. And my question really revolves around where do you think your sales effort to date has been in Canada, and how quickly will this approval which obviously makes it a lot easier for customers to use the equipment, how quickly do you think it will translate into sales? Or is it really a case where you’re going to be starting off or not starting off but at least reinvigorating the sales effort with this new flexibility. What I am really getting at is, has your sales efforts been frustrated and you have had customers that have been frustrated because they really would like a product that would have the flexibility that this new approval will authorize so there is a kind of pent up demand there that this will now allow you to satisfy, or is it more of a Greenfield effect?

Clinton Severson

We will have Rick either answer this one.

Rick Betts

So, in Canada, though it’s a multipart question, I would make sure I get all the parts. So prior to the class III approval we have been selling in Canada primarily to hospital systems, research organizations and some provincial indigent population testing that they were doing up there. That was approved by the province but not necessarily through Health Canada for use for our Piccolo. Now we have the class III approval. Yes, we can -- all doctors can use the Piccolo to test patients at the point of care. The second part of the question was, do we expect accelerated sales? So obviously yes, we do expect accelerated sales. Now the doctors can use the product and it actually has already began to occur. So we are very bullish on what things are going on up in Canada. There are some remaining challenges that need to be addressed up in Canada. One is, something like the United States where you have central payment system, a player with Medicare, you do without in Canada, but it is adjusted provincially, so there are various with regulatory things that we have to address provincially. And as we start knocking over those hurdles each province, we will see growth coming from each province throughout the fiscal year. So hopefully that answers your question.

Unidentified Analyst

If I could follow up real quickly on that, does that suggest that you got established reimbursement rates on a provincial basis. Is that one of the elements?

Rick Betts

Not reimbursement rates. One of the elements is understanding the overall payment structure provincially. Yes, so there are, just like in the United States there is a technical component for reimbursement, and a professional component for reimbursement. So making sure that you -- and then there’s and when you wants changes between those provincially, so that’s one of the things that we’re discovering right now, and will help solidify the overall message that we go forward -- go to market with and each of the provinces.

Yes, I mean I think the Abbott folks have plan, its aggressive for this fiscal year consistent with our goals of double-digit growth. And I think expectations are that they’re going to hit their numbers and maybe do better than what they planned. We are clearly working with them on a quarterly basis where at the end of every quarter Rick is going to have a meeting with the Abbott folks to review what worked and what didn’t work, and what changes if any we’d need to make. And I’m optimistic that this Abbott thing is going to work. We’re keeping close to Abbott Centre.

Operator

This concludes a question-and-answer session. I would like to turn the conference back over to Clint Severson for any closing remarks.

Clinton Severson

Okay, I want to thank everybody for tuning in, and reiterate that we’re very happy to closeout FY 2014, and after going through the pain we went through this last four quarters we are looking forward to all the pleasure about growing our business. Like I said, we have go of double-digit growth on both top and bottom line. And we’re looking forward to our Q1 conference call in July to share all that good news with everybody. So anyway, thank you again for tuning in and yes we will talk to you in July. Thank you very much.

Operator

The conference is now concluded. Thank you for attending today’s presentation. Please disconnect your lines.

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